Ms. Schwartz
introduced the following bill; which was referred to the
Committee on Ways and
Means

A BILL

To amend the Internal Revenue Code of 1986 to allow a
deduction for patent box profit from the use of United States
patents.

1.

Short title

This Act may be cited as the
Manufacturing Innovation in America
Act of 2013.

2.

Deduction for patent
box profits

(a)

In
general

Part VI of subchapter
B of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the
end the following new section:

200.

Patent box
profits

(a)

Allowance of
deduction

If the taxpayer elects the application of this section,
there shall be allowed as a deduction an amount equal to 71 percent of the
lesser of—

(1)

the patent box
profit of the taxpayer for the taxable year, or

(2)

taxable income
(determined without regard to this section) for the taxable year.

(b)

Patent box
profit

For purposes of this
section—

(1)

In
general

Except as provided by paragraph (9), the term
patent box profit means, with respect to a taxable year, IP profit
multiplied by the ratio—

(A)

the numerator of
which is the 5-year research and development expenditures of the taxpayer with
respect to the taxable year, and

(B)

the denominator of which is the 5-year
total costs of the taxpayer with respect to the taxable year.

(2)

IP
profit

The term IP profit means the excess (if any)
of—

(A)

patent gross
receipts, over

(B)

the sum of—

(i)

the taxpayer’s
cost of goods sold for the taxable year that are properly allocable to patent
gross receipts,

(ii)

other expenses, losses, or deductions
(other than the deduction allowed under this section), which are properly
allocable to patent gross receipts, plus

(iii)

routine
profit.

(3)

Routine
profit

The term routine profit means—

(A)

the taxpayer’s cost of goods sold for the
taxable year properly allocable to patent gross receipts reduced by the portion
of cost of goods sold related to the sum of cost of raw materials, cost of
items purchased for resale, and amounts incurred for intangible property rights
(including royalties and amortization), multiplied by

(B)

15 percent.

(4)

Allocation
method

The Secretary shall
prescribe rules for the proper allocation of items described in this paragraph
for purposes of determining patent box profit. Such rules shall provide for the
proper allocation of items whether or not such items are directly allocable to
patent gross receipts.

(5)

Special
rules

(A)

Determination of
costs

(i)

In
general

Cost shall be
determined in accordance with the principles of sections 263A and 471, as
provided for by the Secretary under regulations or other guidance.

(ii)

Items brought
into the United States

For purposes of determining cost of goods
sold, any item or service brought into the United States shall be treated as
acquired by purchase, and its cost shall be treated as not less than its value
immediately after it entered the United States. A similar rule shall apply in
determining the adjusted basis of leased or rented property where the lease or
rental gives rise to patent gross receipts.

(iii)

Exports for
further manufacture

In the case of any property described in
clause (ii) that had been exported by the taxpayer for further manufacture, the
increase in cost or adjusted basis under subparagraph (A) shall not exceed the
difference between the value of the property when exported and the value of the
property when brought back into the United States after the further
manufacture.

(B)

5-year research
and development expenditures

The term 5-year research and
development expenditures means with respect to a taxable year the
research and development expenditures paid or incurred by the taxpayer for the
performance of research and development in the United States for which a
deduction is allowed under subsection (a) or (b) of section 174 (determined
without regard to section 41) for the 5-taxable-year period ending with the
taxable year.

(C)

5-year total
costs

The term 5-year
total costs means with respect to a taxable year the excess of—

(i)

all costs paid or incurred by the taxpayer
for the 5-taxable year period ending with such taxable year, over

(ii)

the sum
of—

(I)

the taxpayer’s
cost of goods sold for such 5-taxable year period,

(II)

interest paid or accrued for such 5-taxable
year period,

(III)

taxes paid or
accrued for such 5-taxable year period, and

(IV)

the net gain or
loss for such 5-taxable year period from the sale or exchange of capital
assets.

(D)

Rules relating
to 5-year period

For purposes of this paragraph—

(i)

Not in existence
for entire 5-year period

If
the taxpayer was not in existence for the entire 5-year period referred to in
subparagraphs (B) and (C), such subparagraphs shall be applied on the basis of
the period during which such taxpayer was in existence.

(ii)

Treatment of
predecessors

Any reference in this paragraph to a taxpayer shall
include a reference to any predecessor of such taxpayer.

(6)

Patent gross
receipts

(A)

In
general

The term patent gross receipts means gross
receipts of the taxpayer for the taxable year which are derived from the sale,
lease, license, or other disposition of qualified patent property.

(B)

Related
persons

(i)

In
general

The term patent gross receipts shall not
include any gross receipts of the taxpayer derived from property leased,
licensed, or rented by the taxpayer for use by any related person.

(ii)

Related
person

For purposes of clause (i), a person shall be treated as
related to another person if such persons are treated as a single employer
under subsection (a) or (b) of section 52 or subsection (m) or (o) of section
414, except that determinations under subsections (a) and (b) of section 52
shall be made without regard to section 1563(b).

(7)

Qualified patent
property

(A)

In
general

The term qualified patent property means
property which is a product which incorporates a qualified patent or
patents—

(i)

if more than a
substantial percentage of the value of the product is derived from the direct
or indirect use of one or more qualified patents, and

(ii)

the gross
receipts of the taxpayer from the sale, lease, license, or other disposition of
the product are domestic production gross receipts under section
199(c)(4).

(B)

Special rule
relating to contract manufacturing

For purposes of subparagraph (A)(ii), if
the product was produced to the taxpayer’s specifications within the United
States under a contract, the taxpayer’s gross receipts from the sale, lease,
license or other disposition of the product shall be treated as domestic
production gross receipts if the contract manufacturer certifies to the
taxpayer that the contract manufacturer’s sale of such product to the taxpayer
resulted in domestic production gross receipts of the contract
manufacturer.

(C)

Domestic
production gross receipts

For purposes of this paragraph, the
term domestic production gross receipts has the meaning given such
term by section 199(c)(4), except that the term United States as
defined in subsection (d)(7) of this section shall be substituted for the term
United States as used in such section.

(8)

Qualified
patent

(A)

In
general

The term qualified patent means a
patent—

(i)

issued or extended by, or for which an
application is pending before, the United States Patent and Trademark Office
under title 35, United States Code,

(ii)

with respect to
which—

(I)

the taxpayer is
the patent owner or the holder of an exclusive license to exploit the patent
within a specified territory or for a specific purpose,

(II)

the taxpayer is actively involved in the
decisionmaking connected with exploiting the patent, and

(III)

either the taxpayer or a member of the
affiliated group of which the taxpayer is a member performed substantial
activity to develop the patented invention, its application, or a product
incorporating the patented invention, and

(iii)

for any taxable
year beginning after the third taxable year beginning after the date of the
enactment of this section, more than a substantial percentage of the activity
to develop the patented invention or its application occurs in the United
States.

Clause
(iii) shall not apply to a patent if a member of the taxpayer’s affiliated
group performed more than a substantial percentage of the activity to develop
the patent outside the United States prior to the end of such third taxable
year, and the taxpayer owns the patent in the United States at the end of such
third taxable year.(B)

Special rule for
certain foreign patents

If
the taxpayer—

(i)

is the patent owner or the holder of an
exclusive license to exploit a patent which meets the requirements of
subparagraph (A),

(ii)

is issued or
extended by a foreign country a patent for the same or substantially similar
invention or application as the patent described in clause (i), and

(iii)

is the owner of,
or the holder of an exclusive license to exploit, the foreign patent described
in clause (ii),

then the foreign patent described
in clause (ii) shall be treated as a qualified patent for purposes of this
section.(C)

Special rules
relating to licensing

(i)

Licensee
Taxpayer

In the case of a
license of a patent to the licensee taxpayer, the patent shall not be treated
as a qualified patent in the hands of the licensee taxpayer unless the licensee
satisfies the requirements of subparagraph (A)(ii) and the licensor—

(I)

certifies to the licensee (in such form and
manner as the Secretary may prescribe) that the patent satisfies the
requirements of clauses (i) and (iii) of subparagraph (A), and

(II)

provides to the
licensee such information as the Secretary may require to determine whether the
patent is a qualified patent.

(ii)

Licensor
taxpayer

In the case of a license of a qualified patent by the
licensor taxpayer, the amount of royalties, profit shares, and similar amounts
received from the license that directly relate to the production of qualified
patent property by the licensee taxpayer shall be treated as patent gross
receipts if—

(I)

the licensor meets
the requirements of clause (i),

(II)

the licensor
developed or acquired and added substantial value to the qualified patent, but
only so long as the licensor is regularly engaged in the development and
addition of substantial value to property of such kind, and

(III)

the licensee
certifies to the licensor (in such form and manner as the Secretary may
prescribe) that the royalty relates to the production of qualified patent
property by the licensee taxpayer.

(D)

Special rules
relating to patent claims denied or ruled invalid

(i)

Recapture

If—

(I)

there is a
recapture event with respect to any claim contained in a qualified patent,
and

(II)

a deduction was
allowed under subsection (a) for any taxable year with respect to such
claim,

the tax
imposed by this chapter for the taxable year in which such recapture event
occurs shall be increased by the recapture amount.(ii)

Recapture
event

For purposes of clause (i), the term recapture
event means, with respect to a claim that—

(I)

the patent does
not issue on the basis (in whole or in part) of such claim, or

(II)

such claim is determined by the United
States Patent and Trademark Office or a court of competent jurisdiction not to
be valid.

(iii)

Recapture
amount

For purposes of clause (i), the recapture amount with
respect to a claim is the sum of—

(I)

the excess of the
amount by which—

(aa)

the total tax (determined without regard to
subsection (a)) that would be shown on returns of tax of the taxpayer for all
taxable years for which a deduction was allowed under subsection (a) with
respect to such claim, exceeds

(bb)

the total tax shown on all returns of tax
of the taxpayer for all taxable years for which a deduction was allowed under
subsection (a) with respect to such claim, determined with regard to subsection
(a), plus

(II)

in the case of a recapture event described
in clause (ii)(I), interest at the underpayment rate established under section
6621 on the amount determined under subclause (I) for each prior taxable year
for the period beginning on the due date for filing the return for the prior
taxable year involved.

(9)

Alternative
determination of patent box profit

(A)

In
general

In accordance with
regulations or other guidance provided by the Secretary, the taxpayer may elect
to determine patent box profit as the amount equal to the net income derived
from patent gross receipts related to exploitation of the qualified patent that
would be received for the taxable year if all transactions of the taxpayer for
the taxable year were conducted at arm’s length under the principles of section
482.

(B)

Election

An election under subparagraph (A) for a
taxable year shall apply with respect to all qualified patents. Such election,
once made, may be revoked only with the consent of the Secretary.

(c)

Alternative
method for certain taxpayers

In the case of a taxpayer which
meets the $5,000,000 gross receipts test of section 448(c) for the taxable
year, patent box profit shall be the greater of the amount determined under
subsection (b) or 50 percent of IP profit.

(d)

Definitions and
special rules

For purposes of this section—

(1)

Application of
section to pass-thru entities

(A)

Partnerships and
S corporations

In the case of a partnership or S
corporation—

(i)

the deduction
under subsection (a) shall be determined at the partner or shareholder
level,

(ii)

except as provided in clause (i), all
determinations relating to receipts, expenses, and whether a patent is a
qualified patent shall be made at the entity level, and

(iii)

each partner or
shareholder shall take into account such person’s allocable share of each item
described in clause (i) or (ii) of subsection (b)(2)(A) (determined without
regard to whether the items described in such clause (i) exceed the items
described in such clause (ii)).

(B)

Trusts and
estates

In the case of a trust or estate—

(i)

the items referred
to in subparagraph (A)(ii) (as determined therein) shall be apportioned between
the beneficiaries and the fiduciary (and among the beneficiaries) under
regulations prescribed by the Secretary, and

(ii)

for purposes of
paragraph (2), adjusted gross income of the trust or estate shall be determined
as provided in section 67(e) with the adjustments described in such
paragraph.

(C)

Application to
individuals

In the case of an
individual, subsection (a)(2) shall be applied by substituting adjusted
gross income for taxable income. For purposes of the
preceding sentence, adjusted gross income shall be determined—

Any person who receives a qualified payment
from a specified agricultural or horticultural cooperative shall be allowed for
the taxable year in which such payment is received a deduction under subsection
(a) equal to the portion of the deduction allowed under subsection (a) to such
cooperative which is—

(I)

allowed with
respect to the portion of the patent box profit to which such payment is
attributable, and

(II)

identified by
such cooperative in a written notice mailed to such person during the payment
period described in section 1382(d).

(ii)

Cooperative
denied deduction for portion of qualified payments

The taxable
income of a specified agricultural or horticultural cooperative shall not be
reduced under section 1382 by reason of that portion of any qualified payment
as does not exceed the deduction allowable under clause (i) with respect to
such payment.

(iii)

Taxable income
of cooperatives determined without regard to certain
deductions

For purposes of this section, the taxable income of a
specified agricultural or horticultural cooperative shall be computed without
regard to any deduction allowable under subsection (b) or (c) of section 1382
(relating to patronage dividends, per-unit retain allocations, and nonpatronage
distributions).

(iv)

Special rule
for marketing cooperatives

For purposes of this section, a
specified agricultural or horticultural cooperative described in clause
(vi)(II) shall be treated as having manufactured, produced, grown, or extracted
in whole or significant part any qualifying production property marketed by the
organization which its patrons have so manufactured, produced, grown, or
extracted.

(v)

Qualified
payment

For purposes of this paragraph, the term qualified
payment means, with respect to any person, any amount which—

(I)

is described in
paragraph (1) or (3) of section 1385(a),

(II)

is received by
such person from a specified agricultural or horticultural cooperative,
and

(III)

is attributable
to patent box profits with respect to which a deduction is allowed to such
cooperative under subsection (a).

(vi)

Specified
agricultural or horticultural cooperative

For purposes of this
paragraph, the term specified agricultural or horticultural
cooperative means an organization to which part I of subchapter T
applies which is the owner of, or the holder of an exclusive license to
exploit, a qualified patent.

(E)

Regulations

The
Secretary may prescribe rules requiring or restricting the allocation of items
under this paragraph and may prescribe such reporting requirements as the
Secretary determines appropriate.

(2)

Special rule for
affiliated groups

(A)

In
general

All members of an expanded affiliated group shall be
treated as a single corporation for purposes of this section.

(B)

Expanded
affiliated group

For purposes of this section, the term
expanded affiliated group means an affiliated group as defined in
section 1504(a), determined—

(i)

by
substituting more than 50 percent for at least 80
percent each place it appears, and

(ii)

without regard to
paragraphs (2) and (4) of section 1504(b).

(C)

Allocation of
deduction

Except as provided in regulations, the deduction under
subsection (a) shall be allocated among the members of the expanded affiliated
group in proportion to each member’s respective amount (if any) of patent box
profit.

(3)

Coordination
with minimum tax

For purposes of determining alternative minimum
taxable income under section 55—

(A)

patent box profit
shall be determined without regard to any adjustments under sections 56 through
59, and

(B)

in the case of a
corporation, subsection (a)(2) shall be applied by substituting
alternative minimum taxable income for taxable
income.

(4)

Coordination
with domestic production activities deduction

This section shall
be applied without regard to the deduction allowed under section 199.

(5)

Unrelated
business taxable income

For purposes of determining the tax
imposed by section 511, subsection (a)(2) shall be applied by substituting
unrelated business taxable income for taxable
income.

(6)

Acquisitions and
dispositions

The Secretary shall provide for the application of
this subsection in cases where the taxpayer acquires, or disposes of, the major
portion of a trade or business or the major portion of a separate unit of a
trade or business during the taxable year.

(7)

United
States

The term United States includes the District
of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, the
Commonwealth of the Northern Mariana Islands, the Federated States of
Micronesia, the Republic of the Marshall Islands, and Palau.

(e)

Election

(1)

In
general

The taxpayer may make an election to have this section
apply for any taxable year.

(2)

Pass-thru
entities

In the case of a pass-thru entity, the election shall be
made at the partner or shareholder level.

(3)

Revocation

An
election under paragraph (1), once made, may be revoked only with the consent
of the Secretary.

(f)

Regulations

The
Secretary shall prescribe such regulations as may be appropriate to carry out
this section, including regulations which prevent the abuse of the purposes of
this
section.

.

(b)

Conforming
amendments

(1)

Section 56(d)(1)(A) of such Code is amended
by striking deduction under section 199 both places it appears
and inserting deductions under sections 199 and 200.

(2)

Section
56(g)(4)(C) of such Code is amended by adding at the end the following new
clause:

(vii)

Deduction for
domestic business income

Clause (i) shall not apply to any amount
allowable as a deduction under section
200.

.

(3)

The following provisions of such Code are
each amended by inserting 200, after 199,.

(A)

Section
86(b)(2)(A).

(B)

Section 135(c)(4)(A).

(C)

Section
137(b)(3)(A).

(D)

Section
219(g)(3)(A)(ii).

(E)

Section
221(b)(2)(C)(i).

(F)

Section 222
(b)(2)(C)(i).

(G)

Section
246(b)(1).

(H)

Section
469(i)(3)(F)(iii).

(4)

Section
163(j)(6)(A)(i) of such Code is amended by striking and at the
end of subclause (III) and by inserting after subclause (IV) the following new
subclause:

(V)

any deduction allowable under section 200,
and

.

(5)

Section
170(b)(2)(C) of such Code is amended by striking and at the end
of clause (iv), by striking the period at the end of clause (v) and inserting
, and, and by inserting after clause (v) the following new
clause:

(vi)

section
200.

.

(6)

Section 172(d) of
such Code is amended by adding at the end the following new paragraph:

(8)

Domestic
business income

The deduction
under section 200 shall not be
allowed.

.

(7)

Section 199(c) of
such Code is amended by adding at the end the following new paragraph:

(8)

Coordination
with patent box profits deduction

Qualified production activities income,
taxable income, and domestic production gross receipts shall be determined
without regard to section
200.

.

(8)

Section
199(d)(2)(B) of such Code is amended by striking this section
and inserting this section and section 200.

(9)

Section 613(a) of such Code is amended by
striking deduction under section 199 and inserting
deductions under sections 199 and 200.

(10)

Section 613A(d)(1)
of such Code is amended by redesignating subparagraphs (C), (D), and (E) as
subparagraphs (D), (E), and (F), respectively, and by inserting after
subparagraph (B) the following new subparagraph:

(C)

any deduction allowable under section
200,

.

(11)

Section 1402(a)
of such Code is amended by striking and at the end of paragraph
(16), by redesignating paragraph (17) as paragraph (18), and by inserting after
paragraph (16) the following new paragraph:

(17)

the deduction provided by section 200 shall
not be allowed;
and

.

(c)

Clerical
amendment

The table of sections for part VI of subchapter B of
chapter 1 of such Code is amended by adding at the end the following new
item:

Sec. 200. Patent box
profits.

.

(d)

Effective
date

The amendments made by this section shall apply to taxable
years beginning after the date of the enactment of this Act.